Dividend Reinvestment (DRIP) Calculator
Estimate the long-term power of compounding with reinvested dividends.
Understanding the Power of Dividend Reinvestment (DRIP)
Dividend Reinvestment Plans (DRIPs) are one of the most effective tools for long-term wealth creation. By automatically using your dividend payouts to purchase more shares of the underlying stock or fund, you benefit from the "compounding effect" on two levels: capital appreciation of the shares and the increasing volume of shares generating even more dividends.
How This Calculator Works
The Dividend Reinvestment Calculator uses a year-by-year compounding formula to simulate how your wealth grows. Unlike a simple savings account, this math accounts for annual contributions, stock price appreciation, and the specific impact of taxes on your dividends before they are reinvested.
If you start with $10,000 in a high-quality dividend stock yielding 4%, and the stock price grows by 5% annually, after 20 years of reinvesting dividends and contributing $100 per month, your portfolio could grow to over $115,000. Without reinvesting those dividends, your final balance would be significantly lower.
Key Definitions
- Dividend Yield: The percentage of a company's share price that it pays out in dividends each year.
- Price Growth: The expected annual increase in the share price (capital gains).
- Yield on Cost: Your annual dividend income divided by your total out-of-pocket investment. This shows how hard your initial dollars are working for you today.
- Tax Rate: Many investors forget that dividends are often taxed. Our calculator applies this tax before reinvestment to give you a realistic net result.
Why Reinvesting Dividends Matters
Historically, dividends have accounted for a massive portion of the S&P 500's total returns. When you reinvest, you are effectively "dollar-cost averaging" into your positions. During market downturns, your dividends buy more shares at lower prices, which accelerates your recovery and growth when the market rebounds.
Frequently Asked Questions
Is it better to reinvest dividends or take the cash?
If you are in the "accumulation phase" of your life (saving for retirement), reinvesting is generally superior because it maximizes compounding. If you are in retirement and need the money to pay bills, taking the cash is the standard approach.
Does this calculator account for inflation?
This calculator provides "nominal" values. To estimate purchasing power, you might subtract an estimated inflation rate (e.g., 2-3%) from your "Price Growth" input.